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David Stockman: Deficit Reduction “Flimflam & Swindle,” Taxes Must Rise

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Official Washington congratulated itself for reaching a deal to cut $38 billion from the deficit of the current fiscal year. But some observers aren't impressed. "Flimflam & swindle," is how David Stockman characterized the deal in a recent Fiscal Times column.

"I've seen a lot of accounting smoke and mirrors in my day in government, but this was beyond the pale," said Stockman, my guest on Daily Ticker. "There was nothing real and substantive that actually cuts something and saves a dollar in the whole thing. I calculated, the cash reduction might be a couple of billion dollars."

Stockman knows his way around the budget process. A foot-soldier in the Reagan revolution, he was the youthful director of the Office of Management and Budget during Reagan's first term, and became disillusioned with supply-side economics and the policies that paired large tax cuts and large deficits. His Washington misadventures were chronicled in William Greider's classic The Education of David Stockman and in a memoir, The Triumph of Politics. Stockman spent several years as an investment banker at the Blackstone Group before starting his own investment fund, Heartland Industrial Partners, which invested in manufacturing companies in the Midwest.

When Stockman looks at Washington today, he sees the same type of misdirection, fuzzy math, and only-in-Washington accounting that he saw in the 1980s. The Congressional Budget Office found that the actual reduction is about $352 million. The flim-flammery, Stockman says, arises from the difference between cutting actual spending and cutting spending authorization.

Among the gimmicks: the deal reduced "spending" for the Census by $6 billion. "The problem is that happened last year, and it's over," said Stockman. " They didn't save a dime. It was a placeholder in the continuing resolution." Several billion dollars were cut from defense military construction "when the defense department didn't even ask for the money." The agreement claimed $5 billion in savings from capping expenditures in a fund for crime victims. "But the program only spends $750 million annually, so they cut six times more than the annual limit of the program."

The upshot: a lot of sound and fury, signifying nothing. "We're borrowing $6 billion a day, so after this entire orchestration they went through, they probably saved less than one day's worth of borrowing for the balance of this fiscal year." Many of the Republican freshmen were shocked to learn that the advertised cuts weren't real. But to Stockman, this is business as usual. "The appropriations committees in Congress -- House and Senate, Republican and Democrat -- are cesspools of deceit, and they have endless ways to trick the rest of Congress into thinking they're doing something."

Stockman sees similar shenanigans and deception afoot in the long-term deficit reduction plans. Rep. Paul Ryan, the earnest, young Midwestern legislator who has put forth a $4.2 trillion deficit reduction plan, may remind Stockman of his younger self. (Stockman was elected to Congress from Michigan in 1976 at the tender age of 30) But Stockman doesn't think much of his plan. "Ryan for instance says he gets to a balanced budget, but he does so in the fiscal afterlife, in 2030. That's irrelevant. The issue is what you're doing two or three years from now."

What's more, the Ryan plan is full of the same type of phantom cuts that characterized the budget deal, albeit on a much larger scale. For example, the Ryan plan calls for cuts of $1.2 trillion over the next decade in spending on the wars in Iraq and Afghanistan. But those aren't real cuts. "This is because of a convention that says peak spending was $150 billion a year, and they project that [level of spending] out into the indefinite future," Stockman said. The budget baseline Ryan used assumed spending would continue on that level "when we already know we'll be out of Iraq by year's end, and hopefully we'll be out of Afghanistan soon." Meanwhile, the Ryan plan wouldn't make real cuts in entitlement programs like Medicare until ten years from now.

As much as it has a spending problem, the U.S. also has a taxing problem. Stockman says taxes have to go up -- across the board. "Here's where I take strong issue with the Obama administration," he said. " They want it [the Bush tax cuts] to expire on the top two percent of earners. They can get by. But we can't afford any of the Bush tax cuts, and therefore we're going to have to let them all expire."

Stockman, who is now working on a book about Washington and relationship between public and private sector, may be the model of an establishmentarian. And much of the establishment is now banking on the possibility of a grand bargain that will reduce deficits and place entitlement programs on a sounder footing. But Stockman has little faith in Washington's ability to handle the nation's fiscal problems. "The reason we're going to end in some kind of thundering conflagration is that they have been playing numbers games so long they can't understand what the real choices are."

Daniel Gross is economics editor at Yahoo! Finance

Email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm

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